Australia's dangerous economic divide

From the peak of Radio Hill you can see the entire town of Newman, an isolated settlement that typifies the riches and challenges of Western Australia's runaway resource boom.

Resting atop the mineral-rich red soil of the Pilbara region, the flat town is windswept, sun-baked and dusty. On an average summer day, the temperature soars to nearly 40 C. A few lonely trees provide limited shade.

Living in this desolate place is shockingly expensive. The average rent for those without company-subsidized housing is $1,800 Australian ($1,774 Canadian) a week - pricier than New York, Tokyo or London.

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Newman's exorbitant cost of living exemplifies Australia's "two-speed" economy: booming in the West - owing to soaring Chinese demand for commodities such as the iron ore mined here by BHP Billiton - and struggling in the East. The resource boom in Western Australia has put the country at risk of contracting a classic case of what economists call Dutch disease, creating a commodity-powered currency that punishes industry outside of the mining and oil and gas sector. It has also spawned a tricky monetary policy dilemma for Australia's central bank as it tries to rein in resource-driven inflation while at the same time creating conditions that foster economic growth in the rest of the country.

But Western Australians have little sympathy for Eastern woes. Inadequately funded infrastructure, health care and education in the West is fuelling contempt for the economic and tax policies of the central government in Canberra and the lifestyle of Australia's southeastern residents, such as those in Sydney and Melbourne.

"We make all the money and they spend it," says Rick Yeates, a mining-sector veteran and the head of Middle Island Resources Ltd.

Australia's growing economic schism reads like an extreme version of the increasing friction between the resource-focused provinces of Canada's West and the manufacturing and financial services-driven economies of Ontario and Quebec. Down Under, the global commodity boom has created a dangerous economic divide.

Canadian resource-sector executives are watching with interest as Western Australian resentment gains political muscle, manifesting itself most recently in the June toppling of Australia's prime minister, an ousting caused, in part, by an ill-advised levy on mining company profits.

As the economic importance of resources increases and spawns new areas of influence, Canadian politicians are also taking notes. The politicization of Western Australia has a counterpart in the rising political influence of Canada's West, most recently demonstrated by Ottawa's surprise decision to block the proposed sale of Potash Corp. of Saskatchewan Inc. to BHP, after the provincial government under Premier Brad Wall opposed the takeover.

At a private lunch club filled with mining executives in Western Australia's capital of Perth, Mr. Yeates lays out a long list of Western grievances with the East, most notably that the resource sector is doing all the heavy lifting for the Australian economy.

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While such complaints may have been ignored as mere grumbling in the past, the miners' sphere of influence is growing almost as rapidly as the value of their companies. Australia is living through a period of prosperity "which occurs maybe once or twice in a century," Reserve Bank of Australia Governor Glen Stevens said on Monday, and mining companies are the key drivers of that growth.

Western Australia barely felt the tsunami of ill effects caused by the global financial crisis and is expected to continue leading the Australian economy's growth in the near term.

According to Canberra-based Access Economics, growth in regions endowed with minerals and oil and gas will far outstrip growth in the country's more populous states next year.

Western Australia is expected to enjoy gross state product (GSP) growth of 4.9 per cent in 2011. Northern Territory GSP is forecast to grow at 4.3 per cent and Queensland's at 3.9 per cent. Meanwhile, New South Wales will grow by just 2.9 per cent and Victoria will grow by 3.6 per cent, slightly ahead of Australia's overall growth forecast of 3.5 per cent.

With economic growth comes power, and the sector's executives are taking advantage of their new-found political influence to press their demands in Canberra.

Topping the list of Western complaints is the infamous mining tax introduced earlier this year by the Labour government of former prime minister Kevin Rudd.

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Australia's mining sector and the state government of Western Australia went apoplectic over the proposed levy, which originally aimed to tax 40 per cent of the profits from Australian mining companies and shift royalty payments away from state governments.

In response to an unprecedented lobbying effort led by the largest mining companies operating in Australia, including BHP, Rio Tinto Ltd. and Xstrata PLC, the central government was forced to back down, reducing the tax to 30 per cent of profits and limiting it to major iron ore and coal miners.

Still, the botched attempt to extract more government revenue from the mining sector, which complains that Canberra's investment in infrastructure in Western Australia and other isolated resource areas has been appalling, cost the prime minister his job.

In a move that emboldened the increasingly politicized resource sector, Mr. Rudd was replaced in June by rival Labour Party member Julia Gillard, who narrowly escaped defeat in a recent election. Now Ms. Gillard has been left to try to govern Australia's first minority government since the 1940s.

"We've never been the catalyst for turfing a prime minister," Mr. Yeates says with a smile.

What rankles Mr. Yeates and other Western Australians so much is not only the lack of investment by Canberra in Western Australian infrastructure, services and health care, but also the attempted direct interference with the state's way of life.

Australia's West is fiercely independent and always has been. It was the last to join the federation. It recently decided to opt out of the national daylight savings time program. Until the recent elections in Victoria, Western Australia was the only state to have a conservative, Liberal party government. Residents here once had a vote on seceding from Australia - a movement that is once again gaining traction.

While secession is highly unlikely, Western Australia has certainly found its political voice, thanks to the resource boom.

"We need the central government to create well-thought-out policies and certainty," says Joe Belladonna, the chief financial officer of nickel miner Western Areas NL, which is listed on the Australian and Toronto stock exchanges.

On the day the original mining tax was introduced, Western Areas' stock was hammered and Mr. Belladonna is concerned that further ill-considered government policies aimed at funnelling more revenue from the West will deter potential investors.

"While the minerals are locked in the country, [the]investment to exploit them is not," he says.

The resource sector is expected to account for more than half of the $123-billion (Australian) in private business spending forecast over the coming year. Rio Tinto and BHP are spending tens of billions to expand their iron-ore operations in the Pilbara region, and Chevron Corp. is the lead investor building a $43-billion liquefied natural gas project off the coast of Western Australia - the country's largest-ever resource project.

But rising economic and political influence also brings a slew of new challenges.

If the central government chooses to cater policy and spending decisions to the resource-rich states, it risks leaving behind the services and manufacturing-driven regions of New South Wales and Victoria. The ill effects of such a policy shift will be compounded if and when commodity demand subsides.

More pressing are immediate concerns about wage and price inflation in the resource sector spilling over into the rest of the country.

The commodity boom has pushed the Australian dollar's value above both the Canadian and U.S. currency, boosting purchasing power but also harming domestic manufacturing. A series of interest rate hikes by Australia's central bank aimed at containing inflation is starting to squeeze borrowers and home owners in the Southeast. Although he has signalled that further rate hikes won't come until next year, Glen Stevens, Australia's central bank governor, said this week he does not expect inflation pressures to subside any time soon.

"Mining is putting enormous pressure on the rest of the trade market," said John Freebairn, an economics professor at the University of Melbourne.

Wage inflation is so acute in some parts of Western Australia that a bartender might soon be able to command an annual salary of close to $100,000.

"If we eventually have to pay someone $100,000 a year to pull beer in Melbourne, then we are stuffed," Mr. Freebairn says.

Western Australia's mining towns are indeed booming, but also struggling with their new-found prosperity and growth. Take Newman, whose 5,000 full-time residents mine and process the key steel-making ingredient, iron ore, at BHP Billiton Ltd.'s enormous Mount Whaleback operations. Residents who don't work in the mining industry have jobs that support those who do.

Yet while miners are making $100,000 a year on average, essential government services are still lacking. Pregnant women from Newman must spend the final four weeks of their term in Perth, 1,168 kilometres to the south - a 12-hour car journey or two-hour flight. The hospital in Newman does not have an anesthetist and therefore can't deliver babies.

When they do return to Newman, finding affordable child care becomes a problem. Recently, a new daycare facility was opened to try to ease a chronic shortage. But at $100 a day for each child, it is too expensive for many residents and remains half-full. Regardless, the daycare's director, Kaye Van Nieuwkuyk, says she is still having difficulties finding staff, owing to Western Australia's massive labour shortage.

"I just wear my recruitment cap all the time," she explains.

Ranald Taylor, a senior economics lecturer at Murdoch University in Perth, says the riches and difficulties created by the mining boom have vaulted Western Australia and the resource sector onto the national political stage.

"The amount of money the mining companies have to influence - it is mind-boggling," Prof. Taylor says.

And it appears that sphere of influence is going beyond lobbying and political donations. Australia's richest woman, Gina Rinehart, chairwoman of Hancock Prospecting Pty Ltd., recently made a surprise $165-million investment in the Ten Network private television empire. Australian media is speculating that Ms. Rinehart, whose fortune was made in iron ore and coal mining, is seeking to have more political influence through her 10-per-cent stake in the national network.

Still, Mr. Taylor points out that the new power Western Australia has is being driven largely by outside forces. Just as the West has helped to prop up Australia's economy during the global financial crisis, the Western state's economy remains dependent on the financial strength of China.

"It just so happens we have the things China needs to invest in," he says.

With a fragile hung parliament, the task of appeasing the upstart West while keeping the rest of the country economically viable amid persistently slow global growth, falls to Australia's Prime Minister, Ms. Gillard. Her successes, setbacks and potential failures will very likely provide a road map for her Canadian counterpart.

Until the global resource boom runs out of steam, Canada's West, as well as more recent additions to the commodity club such as Newfoundland, will continue to gain more political sway. Ignoring the concerns of the country's most populous central provinces, however, will only serve to intensify Canada's own version of Australia's two-speed economy.

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